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Anti-Globalism passes along a review in Ars of some recent speculation on the role of interconnected computer models in the global economic crash. "If Ritholtz, Taleb, Mandelbrot, and the rest of the computer modeling and financial engineering naysayers are correct about the big picture, then we really are arguably in the midst a bona fide computer crash. Not an individual computer crash, of course, but a computer crash in the sense of Sun Microsystems' erstwhile marketing slogan, 'the network is the computer.' That is, we have all of these machines in different sectors of the economy, and we've networked all of them together either directly (via an actual network) or indirectly (by using the collective 'output' of machines in one sector as input for the machines in another sector), and like any other computer system the whole thing hums along nicely... up until the point when it doesn't."

I am not an economist but I have owned a couple businesses and consider myself a reasonably practical person.

I have always believed that the vast majority of today's financial instruments have been invented out of thin air for no reason other than to ultimately ensure the employment of bankers and brokers.

For example, lots of people have a checking account, savings account, credit card, poersonal line of credit, HELOC, brokerage account, and more. I see absolutely no reason why a single account could not offer all those features. The only reason you "need" all that is because the banks created all these funny rules so that they could introduce more and more products and services. This is done so they can charge you more for each of those things, and also to differentiate them from their competitors.

Besides consumer banking, can somebody explain to me why we NEED "commercial paper"? Yes, I've read the wikipedia page and I know how it's used, but I don't understand why it's needed. If you can't make payroll then you're pulling from your credit one way or another - why do we need separate instruments for a 2 week loan versus a longer term loan, or a credit card, or whatever?

And don't even get me started on real estate lending...

It's like freaking starbucks - you can get your banking services just as special as an upside-down triple no foam half calf non fat 160 degree two splenda mocha. But it's one thing for a coffee company to cater to every individual snowflake's desire, and quite another IMHO for something as important as our financial system to become as absurdly complex and fragile as it is.

As for the people who are really benefitting from all this complexity - well, it's only during recession that we all collectively take a good hard look at who's making a contribution to society and who isn't. Unfortunately the powers that be think they can beat a recession by tweaking some rates, stealing from taxpayers, or shuffling money from one hand to the other. That's just going to hurt us more in the long term. We need to clean this shit up now - get rid of unnecessary products and overhead, and let the unproductive companies go bankrupt. Let the UAW strangle themselves to death. Just get it done.

The part I want 'splained is: Why does anyone think that the stock market is a serious indicator of the state of the economy?

These types of exchanges (stocks, commodities, etc...) are Gambling dressed up for high society. That doesn't mean that they aren't reasonable investments over the long haul. Any reasonable person looking at them over the short haul will see that they are driven by everyone trying to guess which way everyone else is going to jump. This is simply gambling.

Everyone knows the market is going to be way up in a few years because it is currently highly undervalued but because the vast majority of investing groups are buying and selling with short term gain in mind the market is bouncing around like a superball. Maybe if someone was required to hold a stock for a minimum period of time it would make stocks an indicator of something.

Off to the side of this:
I really think that the government could free up a huge quantity of the credit blockade by lending directly to the enduser to force the various credit companies to wake up and try to compete for their markets.

Example: Home loans. 30 year fixed rates have usually floated at around 2+% over prime. Now because the mortgage companies wrote unserviceable loans so they could sell them instead of service them, they are all licking their wounds and are currently loaning at 5+% over prime. This works out to a subsidy to the mortgage companies so they can make up for their idiot losses. At the same time no one can sell their house because no one can get credit and if the houses don't move the price drops screwing home owners. At the same time banks are dumping foreclosed homes further driving down the home price comps. (Oh and the banks DO make loans for the houses they are dumping!!!)

If they would just refinance the so called "Toxic debt" mortgages at 3% over prime it would drop the payments down to a point where most of the "toxic" loans would be workable for the debtors and then they wouldn't be toxic. At 3% over prime it would be plenty profitable too. If they would force the mortgage companies to carry the paper on a portion of the loans (selected at random) it would guarantee that they wouldn't write fraudulent loans either...

The part I want 'splained is: Why does anyone think that the stock market is a serious indicator of the state of the economy?

If you're looking to the stock market as a barometer, you're in for a let down. The price of a stock depends on so much more than just the state of the economy. The only real rule is: historically high stock prices usually indicate overconfidence, and historically low stock prices usually indicate undue pessimism.

Everyone knows the market is going to be way up in a few years because it is currently highly undervalued...

You sound like the prognosticators in 1929. But it took 22 long years for the Dow to surpass its pre-depression highs. Don't commit the same sin of hubris that got us here in the first place.

Maybe if someone was required to hold a stock for a minimum period of time it would make stocks an indicator of something.

But that would remove one of the main reasons to own stocks, their liquidity. We don't need stocks to be an indicator of anything at all. All they represent is the value the market places on projected earnings.

I really think that the government could free up a huge quantity of the credit blockade by lending directly to the enduser to force the various credit companies to wake up and try to compete for their markets.

Now here's where you lost me. You think that banks are going to try and compete with the government, which can borrow money to lend at almost zero cost. Banks have to get their money from somewhere, and their risk of default is seen as so much higher than the government's, that the interest rates they can borrow at are sky high right now. Why would they try to compete with the government at all? They're almost guaranteed to lose.

If they would just refinance the so called "Toxic debt" mortgages at 3% over prime it would drop the payments down to a point where most of the "toxic" loans would be workable for the debtors and then they wouldn't be toxic. At 3% over prime it would be plenty profitable too. If they would force the mortgage companies to carry the paper on a portion of the loans (selected at random) it would guarantee that they wouldn't write fraudulent loans either...

I think you underestimate the scale of the mortgage problem. There is too much debt out there on homes that are worth nowhere near what is owed. What incentive does the homeowner have to repay a loan when they are $100,000 underwater? Even at a zero percent interest rate, it just doesn't make sense for the borrower. Those toxic loans are called "toxic" because there's really no good way to fix them.

Fractional reserve is the root of our problems today. The system is designed to lend out more money than actually exists, thus the economy is overloaded by design, and inflation is guaranteed.

Well I don't know about you, but I'm pretty sure them cows don't produce 3% more milk with each passing year, nor do they yield 3% more meat. You can say what you want about wealth, but there is a fixed amount of natural, life-sustaining resources in the world, and printing more money isn't going to change that.

Well I don't know about you, but I'm pretty sure them cows don't produce 3% more milk with each passing year, nor do they yield 3% more meat. You can say what you want about wealth, but there is a fixed amount of natural, life-sustaining resources in the world, and printing more money isn't going to change that.

Wrong. The cows do, in fact, produce more milk every year (not the individual cow, but the average cow). More importantly the dairy industry becomes more efficient every year, making it possible to have more cows using fewer resources..

"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Albert Bartlett

Production and efficiency in a single industry can only increase for so long before the results become absurd or impossible.

The average dairy cow in the US produces ~20,000 pounds of milk annually (rounded for simplicity). If we pretend we can get 3% improvements annually, then after 100 years we'll have nineteen times the milk we started with. At the end of 200 years, each cow is producing a pound of milk every four and a quarter seconds. In 300 years, 4.5 pounds/second. You'd have to stick a pipe down its throat just to prevent dehydration.

And as far as more cows using fewer resources goes, you run up against basic physics. Calories in >= calories out. Efficiency improvement is constrained by the universe.

Actually, they do. In most modern fiat currency models, banks must hold a minimum reserve relative to the amount of loans they give out, but can otherwise issue loans up to that ratio.

In fact, banks quite literally create money by making these loans, which is how the US money supply grows (and is one of the reasons why adjusting the interest rate affects inflation... if you reduce the rate at which loans are granted, you reduce the rate the money supply grows, which translates to lower inflation). It's actually a pretty fascinating, if confusing, topic. I'd recommend reading up on it!

Everyone knows the market is going to be way up in a few years because it is currently highly undervalued but because the vast majority of investing groups are buying and selling with short term gain in mind the market is bouncing around like a superball.

True, but this situation may not be an ideal time to go long. As the old saying goes, the market can be wrong far longer than you can stay solvent.

Caveat emptor, your mileage may vary, and no platypuses were harmed in the making of this posting.

We don't need it. But the system made people borrow more than they could.

First it was "minorities" (or rather ACORN's definition of a minority "someone who votes for us") that got suspended rules on borrowing, thanks to the CRA, introduced by one disaster president without teeth, Carter, also known for being the cause of the human rights situation in Iran, and activated by the next disaster president, Clinton.

But the damage that this inevitably caused was seen by many opportunists that were just about every

...,who are the original spark that started the fire, I do not want to claim it's "their fault", but they are part of the problem)

This whole post is total bullshit. The notion that, somehow, attempts to counter historic discrimination against blacks and other minorities set off the economic crisis is just foolish. The regulations imposed on certain banks were very modest, and were essentially designed to prevent worthy borrowers from being denied due to where their house was located ("redlining"). Nothing in the CRA requires banks to extend loans to people who can't pay them back. Most of the banks that were hit hardest by the mortgage crises weren't even subject to the CRA, because they weren't commercial banks. Yet the whiners in the pundit class persist in arguing that armies of poor people strong-armed poor, defenseless banks into making bad sub-prime loans. Never mind the studies that have shown that CRA-regulated banks were less likely to make subprime loans, and less likely to re-sell their loans. Never mind the fact that only one in four sub-prime loans originated from a CRA-regulated bank. Yep... poor people. The secret masters of our economy.

And Jimmy Carter? He might have been a tool of a president, but blaming him for Iran is bizarre. Horrible policy making in the region going back to WWII sunk Iran. Jimmy was just lucky enough to be there when the music stopped.

On the contrary. Even the New York Times, in their 1999 article Fannie Mae Eases Credit To Aid Mortgage Lending [nytimes.com], recognized that 'If [the subprime market] fail[s], the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.' (The thrift industry episode was back in the 1980s, before my time). Fannie Mae is to entirely to blame. The rest of the world didn't help, but Fannie Mae is entirely the core and the cause of the current crisis, and the destructive po

Why? The point is there, the delivery isn't well formed though. Lending money to folks regardless of race, creed, or gender, who don't have the means to pay it back is going to lose every time.

Because nothing about the regulations that the GP poster was talking about ever required banks to lend to people who were unable to pay. Because banks who were subject to those regulations were not responsible for the majority of the sub-prime loans that trashed the market. You're correct that lending to people with

Your understanding of accounting is way off (and so you shouldn't claim to speak for accountants when you write that gibberish).

Also there are a few uncertain assumptions in your little 'analysis' -- one, that the seller chooses to reinvest his sale profits with the bank. You claim that most cash proceeds from the sale of houses was deposited in banks -- this is false. Most was actually reinvested in other real property or elsewhere.

Plus, you ignore the opportunity cost of the funds the bank is due and the risk of default (hence the interest rate on the loan).

I know the banking industry has its problems, but claiming it's a ponzi scheme is just uneducated. The banking system is NOT dependent on influx of new investors to pay their creditors (leaving a gaping cash hole when new investors stop appearing). They are dependent on the stream of payments from existing debtors. When that stream dries up, their ability to lend dries up, since they become cash-flow negative, and eventually have no capital to lend.

The problem is that the banks are unwilling to lend when the expected return on their capital outlay is negative. Due to the fluxed up state of the economy, banks in general have decided that lending is unwise, since the risk of default is so high. The big problem is that banks did not properly assign risk to certain loans, so that they undercharged on the interest rate. The reason this slightly relates to a Ponzi scheme, is that as long as another bank was willing to underwrite a risky loan, then bank could get rid of its risk when the property in question was sold. It was a game of hot potato -- whoever was left holding the risky loan when everyone stopped lending lost. And the big problem was that it continued for too long -- eventually the amount of risky loans was so large that almost *everyone* was left holding a sack of hot potatoes. If credit rules had been tightened, rather than loosened, then a few banks would have gotten burnt early, and the problem would not have spiraled.

I am also not a financial expert, but I can see a bunch of reasons why financial paper exists.

Maybe they're like payday loans for corporations. You have a long-term contract due, but not 'till the end of the month, and you want to keep your employees in the meantime. (I'm guessing this isn't as likely; only corporations with outstanding credit ratings can actually have any success in issuing corporate paper.)

Maybe it's a way of getting a loan without going through a bank or issuing stock. Say you want to build a new factory with payroll rather than actually pay your employees; maybe you're assuming the factory will pay off the interest on the corporate paper and then some.

The biggest thing at the end of the Wikipedia article you read is that, whatever the reason the money is needed, it's cheaper than getting it from a bank. If a corporation is big enough and has good enough credit, they can issue corporate paper, at a lower interest rate, instead of paying interest to a bank.

So, that one, at least, wasn't invented by bankers just to secure their own employment. Maybe somebody who actually knows something about this (a banker, maybe?) could enlighten me.

Instead of doing Shady and immoral accounting practices why not do what honest small business do.

YOU HAVE THE CASH ON HAND TO PAY YOUR BILLS.

Accounting has turned into VooDoo and it's what causes these messes.

I dont run out and buy a shitload of gear on credit for my video and photography business. I do what sane people do.. when I can afford it I buy it. when the hard times hit, I ride it out easily while my competition scrambles to try and pay off the 60 some loans and their credi

Cash in the bank is money sitting idle. You want your money out there, earning for you. If you choose an overly conservative strategy where you don't borrow money, then your business isn't running efficiently. I assume you're an owner...in a corporation, you would be subject to lawsuits and removal if you are not getting the shareholders the maximum benefits available. Remember, a CEO's goal (lawful duty, actually) isn't to make a profit, it's to maximize profit.

What, so you should have a ton of money in the bank sitting around doing nothing? I live in China, and everyone here does exactly that...it keeps a lot of otherwise useful money locked away where it can not influence anyone, nor make more money. Leveraging isn't what's wrong with capitalism, the current crisis was caused by breaking the law (mortgage fraud) on a massive scale.

Which is why I will never EVER become Incorporated. I prefer honesty and doing things right.

What you say makes ZERO sense. I'm not having "tough times" right now. In fact I have CASH and am sucking up lots of gear being auctioned by my competitors at $0.10 on the dollar. I recently got a $4800.00 Beta cartoni tripod for $500.00 at a Grand Rapids business auction.

Sounds like I'm doing it the right way and all my competitors are not.

Well, you are not going to get rich with that attitude. From what I've seen if you are not back-stabbing, vindictive, willing to fire people to keep the stock prices high, pay yourself more then you are worth, consider people leaches and just a number, and use tax dollars as a personal corporate safety net, then you are not a true corporate leader.

Credit is needed in a system where you are able to make purchases in certain items. The problem is when people over leverage themselves.

And that is exactly what happened. Both businesses and consumers were overleveraged, the realestate bubble burst and the whole cardhouse came crashing down.

Personally I don't see why you would need credit to buy a car though. If you don't have the cash don't buy a new car, get a second-hand one. Cars are a worthless investment, especially new ones. My rule of thumb is to only use credit if you are making an investment that has a very good chance of at least keeping its value.

Homes on the other hand... oh wait, never mind...

(but seriously, even in this market a house will still have considerable value after 10 years, where a car will be close to worthless)

Your exactly right, except that homes really don't go up in value at all, and never have. People just think they go up in value because they go up in price. What they really are is a hedge against inflation.

And deflation in general won't be 75% as home prices come down over the next three years. That's why it's called a bubble.

The value that your home has is that it keeps the rain off of you, and keeps you from being arrested for sleeping in the park. It also makes a handy place to store the stuff with sentimental value you accumulate over time, like offspring.

There will be some interesting side effects from this boom and crash. Right now home prices are crashing at the same time interest rates hit unsust

Credit is needed in a system where you are able to make purchases in certain items. The problem is when people over leverage themselves.

Well, that's how the problem starts.

The problem gets compounded when you treat debt like it's a magical source of new money. As in, if I loan you $10, then you have $10, but then I also have a "debt asset" worth $10, which makes a total of $20. That's exactly how people were explaining it to me as recently as 2007 when suggesting that debt is good and actually "creates we

It sounds like those people were talking about the ideas of M0-3 [wikipedia.org] and trying to extend it to debts. There is a reason M3 is no longer measured: as you go up the scale, the values become more and more meaningless/useless.

Instead of doing Shady and immoral accounting practices why not do what honest small business do. YOU HAVE THE CASH ON HAND TO PAY YOUR BILLS.

Because once a business gets large enough, the cash flow becomes enormously more complex, and very short term credit becomes a cost-effective way of managing cash flow.

Basically, a business wants to match cash inflows with outflows (and to simplify the model, we'll count "profits" as one of the outflows). The problem is when you know that your business is owed cash that's going to arrive in unpredictable payments over the next 30-90 days. Setting up the cash outflows so that they precisely match the inflows becomes hellishly more complex when the number of transactions gets big enough. Short term debt provides a buffer that allows a business to simplify this.

In principle, yes, a business could do the same thing by keeping cash reserves as a buffer, too. But when you take into account the time value of money, that really comes down to the same thing: by keeping cash, the business implicitly pays the opportunity cost [wikipedia.org] of keeping that cash. (And with an inflationary monetary policy, of course, the cash itself becomes less valuable over time.)

So, to sum up, the money owed to the business over the short terms is its accounts receivable [wikipedia.org]; short-term debt allows a business to convert, for a fee, a large fraction of its accounts receivable into cash, and therefore, to draw upon its accounts receivable to finance its operations. I.e., instead of having n dollars of pure, unencumbered cash at its disposal at any one time, it can have n + ((accounts_receivable * reliable_fraction_of_a_r) - interest_on_short_term_debt)); or, equivalently, to keep less unencumbered cash than it would otherwise need to.

I am not an economist but I have owned a couple businesses and consider myself a reasonably practical person.

I have always believed that the vast majority of today's financial instruments have been invented out of thin air for no reason other than to ultimately ensure the employment of bankers and brokers.

Actually, probably not. I suspect (I'm a programmer by nature, so my experience with code may apply here) it's more of each institution and "network" offering redundant services until multiple institutions mature to the point where these services collide and become confusing.

For example, lots of people have a checking account, savings account, credit card, personal line of credit, HELOC, brokerage account, and more.

That wasn't true one generation ago. My parents had only a checking acount, savings account, and credit card.

I see absolutely no reason why a single account could not offer all those features.

With the advent of computers and networks, now it is possible. But 20 years ago? Not possible.

How would a bank know how much equity you had in your house? How would your credit card company know how much you had in the bank? How would your mortgage company know what your investment amount was?

Today, you actually have one company that handles all of it (and in cases where they don't, they can still trade information). So now I can have a HELOC, personal line of credit, credit card, savings account, etc, all tied together, in that credit from one reduces the amount of credit available on another, and all paid from the same account.

The only reason you "need" all that is because the banks created all these funny rules so that they could introduce more and more products and services.

In this case I actually disagree. Different people have different had different "collateral", so different kinds of credit were available to them. That explains why different products exist. Someone with a house vs someone with a strong credit rating vs someone who had lots of money all had access to different products. Now a single person has access to all of them.

This is done so they can charge you more for each of those things, and also to differentiate them from their competitors.

Besides consumer banking, can somebody explain to me why we NEED "commercial paper"? Yes, I've read the wikipedia page and I know how it's used, but I don't understand why it's needed. If you can't make payroll then you're pulling from your credit one way or another - why do we need separate instruments for a 2 week loan versus a longer term loan, or a credit card, or whatever?

As before, commercial paper was "invented" before credit cards (or business lines of credit or whatever) existed. It satisfied a market need that probably doesn't exist today.

And don't even get me started on real estate lending...

It's like freaking starbucks - you can get your banking services just as special as an upside-down triple no foam half calf non fat 160 degree two splenda mocha. But it's one thing for a coffee company to cater to every individual snowflake's desire, and quite another IMHO for something as important as our financial system to become as absurdly complex and fragile as it is.

It's this statement that brought me to this answer. Software is flexible (soft), so it can be molded quite easily to different needs according to different usages. The problem is that after four versions needs have evolved, but the original code has not, so now you have something complex and fragile that was originally quite simple and straightforward.

As for the people who are really benefitting from all this complexity - well, it's only during recession that we all collectively take a good hard look at who's making a contribution to society and who isn't.

My parents had only a checking acount, savings account, and credit card.

In many developed countries (Europe, Japan,...), many people have a single account which supports both checks and debit cards. Mine is also used as a brokerage account, but I'm probably not a typical client.

seems like a busness opertunity here. If someone was looking to build an independant bank perhaps a model of the "one account" may be a way to do it. One number that says how much money you have. You could give yourself logical views of it for planning reasons, but it would be a way of holding your savings, checking, credit, mortgage, etc all into one account with one true number. Probably -200k+ for most, but that's where the planning logical views are. You could say to yourself, "my house is worth $2

Most of it is the way it is because it evolved that way, and because of the laws/rules under which it all evolved. You paint with too broad a brush when you say that the vast majority of today's financial instruments have been created out of thin air. That's nonsense spoken out of ignorance, the same way a non-geek might say, "why can't software designers create programs without bugs?"

Commercial paper is a very broad term and encompasses everything from promissory notes to normal consumer checks. Just about any transaction not involving cash or electronic transfer is done with commercial paper. A huge portion of financial transactions are still done with commercial paper. So in the general sense of the term, it is still very, very necessary.

Now if you want to start examining specific financial instruments, like the derivatives backed by (partially) crap mortgages, we can have a conversation. I think the idea behind those instruments was basically sound, but the things ended up being a lot more complicated than people thought. It makes sense that if you lump a bunch of mortgages together, only a small percentage of those will default, thereby distributing your risk. But in a climate where fraud was rampant and the people signing people up for mortgages had no incentive to make sure people could actually pay those mortgages back, your lump of mortgages has a much higher chance of containing too many bad mortgages to make the resulting instrument profitable.

The derivatives market had the perverse effect of creating and encouraging that climate, because the mortgage buyers would buy without enough questions because they knew there were buyers who would buy the derivatives without too many questions. The fundamental problem with the whole concept, it seems to me, is that the derivative buyers and sellers forgot to insist on and question the credentials of the individual mortgagees they were investing in. Had they done a little bit of verification there, we might not be in this place right now.

Theoretically it's about risk assessment and market segmentation, allow the people making the loans set their acceptable level of risk and required rate of return. Obviously the system broke down, but that's because they came up with instruments so complex that they eliminated information from the system and thus hid the risk.

Many are developed to not be something that was or is heavily regulated by the government. Commerical paper arose because banks charged high spreads between savers and borrowers mostly because the government put them in a regulated, but market with a raised barrier to entry. Commercial paper side stepped the existitng market to reduce capture that spread (by both borrowers and lenders). Rather than a bank making 3% on a loan, a money market fund manager makes about 0.3% (which is much closer to the actua

Essentially, every debt has a risk. Risk determines interest rate. 2 week commercial paper for Ford has a different risk to 2 year commercial paper for Ford (which is different again to GM etc etc). You might have confidence Ford can pay up in 2 weeks, but you're not sure if the economy will tank in 2 years.

Now if Ford needs money for a certain period of time, whether to finance some car leases that are expiring in a month, or to finance some new ones that expire in 2 years, they've got to go to the market

Loopholes have a lot to do with it, a whole lot. They aren't making all those exotic things to keep busy, they are making them to shave a few points off the tax burden, or to sell risky debt for a higher price.

Mainly though it's is liability, security, and liquidity. You have a separate checking account and savings account for stability.

The bank can write off your savings as stable and secure to lend out, since they tend to be stable, where as checking accounts fluctuate wildly. The amount of interest

Banks operate in spreads and there are jolts to the spreads namely payroll, etc, etc. Thus to smooth the jolts you issue paper which gets you over those jolts in a very easy manner.

Let me illustrate. A speaker buddy had to pay a sum of money to his ex-wife. She demanded the lump sum and he did not have the money right away. He said he would have had to sell stock. So I said, do the following:

I have always believed that the vast majority of today's financial instruments have been invented out of thin air for no reason other than to ultimately ensure the employment of bankers and brokers.

Actually, many of them have a good basis in logic, but are used beyond their original purpose.

For example.... I see absolutely no reason why a single account could not offer all those features.

Part of the reason there are individual companies that separated items like brokerages and commercial banking is historical structure created in the Great Depression, known as the Glass Steagall Act [wikipedia.org]

Other responders to your post have pointed out various specific details, e.g. reason for commercial paper, but let me cover a more general point of view on why so many different products exist: Risk.

Our economy is a giant pyramid scheme. Wealth is created through lending by investing in business ventures. It's good for the borrower, who gets the capital to grow their business; it's good for the lender, who gets interest on their loan; it's good for the banks, who take a cut; and it's good for everyone, because savings that would otherwise be sitting in a vault gathering dust is instead flowing through the economy being exchanged for goods and services, etc.

For example, lots of people have a checking account, savings account, credit card, poersonal line of credit, HELOC, brokerage account, and more. I see absolutely no reason why a single account could not offer all those features.

I don't want a single account. I don't want my bank or "Financial institution" fucking with my IRA or checking account if I'm a few days late on my credit card bill. I keep all my financial serviced housed with separate institutions.

Besides consumer banking, can somebody explain to me why we NEED "commercial paper"? Yes, I've read the wikipedia page and I know how it's used, but I don't understand why it's needed. If you can't make payroll then you're pulling from your credit one way or another - why do we need separate instruments for a 2 week loan versus a longer term loan, or a credit card, or whatever?

Because the risks, terms and structures of the loans are different between the different products, and it requires different experti

The masterminds are devious? The ignorance is enforced in the entire system?

Maybe, but could it just be the sheer sustained growth of knowledge and the lack of ability to handle the knowledge? I see people grasping at straws and stepping on each other to acquire not knowledge but wealth. The successes of the few trigger the enthusiasm of the masses. That is exactly what happened until the slippery slope became the avalanche. The funny thing is, what is in this simple analysis that cou

This is done so they can charge you more for each of those things, and also to differentiate them from their competitors.

Well, I'd say that you got it mostly right. There's also a practical matter. In theory, a bank can offer a infinite variety of services. And if we were a lot smarter than we actually are, we could get a service that fits our wants precisely. But from marketing and bureaucratic points of view, infinite variety is bad. It's hard to advertise a huge, nebulous service to customers who can't understand the potential. Concrete simple services are more effectively marketed even if most of the potential is neutered

For example, lots of people have a checking account, savings account, credit card, poersonal line of credit, HELOC, brokerage account, and more. I see absolutely no reason why a single account could not offer all those features.

Neither did advocates of banking deregulation in the 1990s.

One of the reasons for this "redundancy" is (or used to be) that different rules apply to each kind of account. You used to have have commercial banks, investment banks, and insurance companies, and each did something different under different rules. Then the rules that had been in place since the Great Depression were repealed by Gramm-Leach-Bliley, and suddenly the legal boundaries between these kinds of financial services was gone.

Subsequently, we are facing the greatest economic crisis since the Great Depression. Coincidence? I'm not entirely sure, but surely some of the problem is that practices and attitudes that were normal in investment banking suddenly started to crop up in other businesses.

Although Hank Paulson is actually, in my opinion, one of the more decent individuals as a person in the administration, he's very much the wrong man at the wrong time. One of the things he did as head of Goldman Sachs was to convince the SEC to get rid of the "net capital rule". That was the rule that required banks to maintain a certain level of cash on hand to cover cash demands in unusual situations. This is obviously extremely expensive for companies who had to keep huge volumes of cash on hand, losing mind boggling amounts of value even against modest inflation.

Had the rule been kept in place, we might not have had to pony up seven hundred billion dollars to bail out Wall Street.

Take a hollow toothbrush. Fill it with toothpaste. Then take a hollow shaving razor. Fill it with shaving foam. Now glue the toothbrush to the razor. For kicks, lets also glue a fork, a knife and a spoon to this appartus.

Now I claim you can brush your teeth, shave, eat your breakfast, butter your bread, drink your soup - all with this one appartus.

So then why do we have a separate toothbrush, razor, spooon, fork etc ? Is it because we want to ensure the employment of spoonmakers worldwide ?

Commercial paper or financial complexity is not the real problem. The real problem is reality. Let me explain.

There were three fishermen in a village. They were not able to do fishing because they lost their nets. One day one of them heard of a fishing net weaver in the neighboring village. So he went and rented a net from the weaver. To pay rent, he borrowed the money from the same weaver. He could go fishing now. The second one found out and he did the same thing. The third one went to rent a net as well.

That would make sense if it were true. Federal law limits the number of withdrawals from certain accounts to six per month. That's not a bank policy. It's a law. Basically, the government wanted to force banks to keep a certain minimum amount of cash on hand (not loaned out to customers), and to preserve that, they put in place both dollar limits and that cap on transactions. Presumably this was because (at the time) computing the amount of cash on hand at the bank took a significant amount of effort.

That's the problem with laws designed based around limitations in technology. Technology very quickly renders those laws obsolete, but the laws never get removed from the books. Indeed, that's why I feel that all laws beyond a very small core of crucial laws (your basic murder, theft, etc.)---certainly all civil laws and regulations---should be required by the Constitution to have a sunset provision and should be reviewed at minimum every 10-15 years to determine whether the laws are still useful.

has nothing to do with computers. The source of the problem is the source of money. Who decides how much money there is? Who reaps the benefits of creating money which is not backed by real productivity? If you're truly looking for the root of the problem instead of symptoms, then you have to find out about the inner workings of the money system. In other news, the "Federal" "Reserve" bank has once more lowered the interest rate. The dollar is now less than 0.25% away from being free (i.o.w. worthless) money.

In response to Bloomberg's request, the Fed said the U.S. is facing "an unprecedented crisis" in which "loss in confidence in and between financial institutions can occur with lightning speed and devastating effects."

In other words, we'll tell you when we're ready to finally destroy the economy!

No wonder Congressman David Scott said we've "been bamboozled!"

The real number of the bailout is actually $8.5 trillion (as of two we

The dollar is now less than 0.25% away from being free (i.o.w. worthless) money.

A fed funds rate near 0% doesn't mean the dollar is near worthless, it just means that borrowing them has a low nominal cost for those who can borrow at that rate. (Usually, this would mean even a lower real cost, as well, but not in the case of deflation, and the perceived cost could by higher than the nominal cost if deflation is feared/expected, even if it didn't occur; expectation of deflation would also explain otherwise ir

you have to find out about the inner workings of the money system... once more lowered the interest rate. The dollar is now less than 0.25% away from being free

You don't even know how inflation works! And you want people to learn about the banking system? Why? So they can laugh at you?
Inflation is caused by a little more then just how much money the Fed prints. And how much inflation occurs has to do with the banking system, and if there is a signifigant Zero bound problem this may not be enough.

I'm no fan of counter cyclical monetary policy, but if you're going to critique the system you might want actually know what your t

Even a negative interest rate doesn't automatically result in free or worthless money. You still have to pay the principle back and the interest comes (as a payment) in the future where the currency may be worth a lot less.

That's not what a.25% interest rate means. It means that a dollar a year from now is.25% away from being worth the same as a dollar today.

It doesn't mean that, either; the fed funds rate might rationally be expected to have some loose correlation with the value of the dollar over time, but its not the same thing. It relates to how many future dollars someone privileged to borrow at the fed funds rate must sacrifice to get a current dollar, not what the dollar will be worth at the time that bill is due.

It doesn't mean that either; the value of the dollar is also driven by demand and supply, and the supply is currently simultaneously in freefall due to credit destruction in combination with fractional reserve banking and rapidly being inflated through 'quantitative easing', ie, the Fed running the printing presses (they've expanded the money supply by some 150% since september).

Currently the credit collapse is winning out, meaning more money is getting destroyed than the Fed manages to print and distribute

Oh hell no. The value of the dollar is based on supply and demand. A 0% interest rate means that you can borrow dollars at no cost. So if the rate hit 0%, more banks would borrow more money. No reason not to right? This would flood the market with dollars, increasing supply, and so decreasing the value of the dollar. Low interest rates = inflation.

For one, the price of gasoline is not directly tied to the price of crude oil - it's also affected by refinery capacity, supply and demand of other petroleum products, and the varying supply of gasoline in particular.

For two, I've recently witnessed gas prices fall from around $4 to almost $1.50. Am I hallucinating this?

An old, old saying but many of the "newbies" who have adopted computers since the Dot-Com genesis haven't learned the lesson yet. You can't just blindly believe the computer's projections - you need to doublecheck what data was fed to it & if it was valid.

Most financial planners did not do that, and they bet their millions on faulty data or assumptions.

I'd just like to point out the bleedingly obvious: That people programmed these computers. They are functioning exactly as they should be. If they weren't, we'd have heard about it by now. So the problem is not the computers, or the network, but rather the people who control them. Thank you. You may now resume your regular ranting, already in progress.

which, i believe is why the garbage in garbage out syndrome is affecting 'users'. I can't imagine what the 'QA/QC' is like involved in the development of the modeling software for financial sector. shouldn't it be as regulated as, perhaps, the nuclear industry?
Or maybe nobody can maintain all those lines of COBOL...

It's very tightly regulated, and the source code must be independently reviewed prior to certification. They're very ugly about that kind of thing. Computer models might be a problem, but only because they were based on bad assumptions made by the designers... That is a human failing, not a machine one.

What is tightly regulated? Half the Quant algo trading models get thought up in the evening, coded overnight and activated in the market the next morning.

If you try and slow them down they just run to the head of the desk bleating that the "nasty IT man stopped me making $1000,000,000 for the bank with his silly QA nonsense" and whoosh, its in production. It is prop trading so its their risk.

Considering the fundamental basis of the whole system is based on the flawed assumption that credit can be infinitely expanded the current failure is hardly surprising. The Austrian school pointed out the fallacies that caused both the last depression and the current one almost a hundred years ago.

Computers have very little to do with it. Constructing models to fit political economics rather than to reflect reality is closer to the actual problem.

No one group of programmers programmed all these computers, there was no single set of specs for the whole network. All the components may well be "functioning exactly as they should be" (although in reality I'm sure there are a few bugs in the systems, but that's irrelevant here), but the system overall may behave in an unexpected way.

(That said, I don't think that's the whole problem either -- too many people playing a bit fast and loose and less than honestly with other people's money is also part of the problem.)

Its not emergent behavior of computer systems. Its the exact same kind of behavior markets have displayed without computers.

Sure, things haven't been this bad recently, so some elements of it are new, at least in the short term, and the details change always. But none of the big picture stuff has much to do with computers, fundamentally. Economic markets are vastly interconnected because their substantive outputs and inputs (not just data outputs and inputs of the computer systems currently used as tools in managing them) are directly linked.

No one group of programmers programmed all these computers, there was no single set of specs for the whole network. All the components may well be "functioning exactly as they should be" (although in reality I'm sure there are a few bugs in the systems, but that's irrelevant here), but the system overall may behave in an unexpected way.

There's a bug in Internet Explorer. That must mean the entire internet is broken. No. Financial transaction systems are heavily audited, rigorously tested, and subjected to heavy regulation. They are the most hardened systems in wide use in the commercial sector. Period. That doesn't mean there aren't problems, but a problem big enough to cause a network-wide malfunction are very, very low.

What we're dealing with now are people who made bad assumptions about the economy, got cocky, and now we all are paying the price for the lack of oversight and auditing done on the decision-makers responsible. Looking for simple solutions (ie, "the computer did it") to complex problems is naive at best. This took many several thousand people, all making the same bad decisions, to bring us to where we are now. I will say it again -- this is not a technological failure, it's a failure of people. And if you ask me, we should start publishing the "bugs" -- ie, the names and faces of these people, so the rest of us know to never let them anywhere near the financial sector ever again.

What we're dealing with now are people who made bad assumptions about the economy, got cocky, and now we all are paying the price for the lack of oversight and auditing done on the decision-makers responsible.

But those same people were "geniuses" for making so much money for their investors BEFORE it all collapsed.

They are functioning exactly as they should be. If they
weren't, we'd have heard about it by now.

Not always. Many finance outfits use Excel a lot, which doesn't
do statistics properly [forecastin...ciples.com]. However, modern finance has become very statistics heavy in the last ten years, so this shortcoming matters now a lot more.

It is not just the computers, but the humans as well. The entire interconnected system of humans and computers in one planetary collective. A planetary economic dynamical system emerges from this, and takes on a life and behavior of its own, including organizing itself towards a "self-organized criticality" state that would eventually avalanche as it is doing so now.

The system grew far faster than it's underlying resources would allow for, ultimately driving it to a point of exhaustion and shock, leading directly to a cascade of failures spreading around the globe to nearly all segments of the market. It was inevitable, and I saw it coming many years ago, though I could not predict when it would transpire.

It's kinda like earthquakes. You can see the tension between the tectonic plates building up, but you can never be sure when that pressure will release itself. So it goes with the global financial marketplace.

Many parts of this market is zero-sum, yet predicated on the fallacy of "infinite-growth". You cannot have it both ways, my friends. It must fail, and that can "easily" be shown mathematically.

And so my "Greater Fools" theory of the market stands. If you hold a stake in it, your only hope is to find a "greater fool" than yourself to take it off your hands at a higher price. Since the supply of fools are finite, and the resources they hold are also finite, someone *must* be left holding the bag, due to the zero-sum dynamics of the market.

Computers being in the mix only make the shocks more severe and dramatic; but the same applies regardless.

Bubbles would not be an issues if when they happen (it's not like they are hard to spot) everyone just held back and let it deflate, however this will never happen as everyone will want to get in while they can. It's like watching lemmings being herded off a cliff.

Seems to me the author is repeating the mistake himself: By drawing a conclusion not supported by the data, in this case being the evaluation of the role played by computer models here.

And I agree with that datas: The problem isn't the computer/mathematical models. It's how they were used. In particular, people were using models designed to evaluate one kind of mortgage asset, and plugging in an entirely different kind of mortgage, etc.

The author grants that conclusion, but then makes the claim that although the problem wasn't caused by the computers themselves, that it was somehow exasperated by them. - I don't see how that's the case.

Computers and computer modelling makes it easier to create advanced derivatives and such. But it doesn't make us do it. Just look at the engineering world; We don't choose technically advanced solution just because we can. In fact, the tendency is to go for the simplest possible solution. ("KISS rule")

There's only one reason why you would create advanced, incomprehensible derivative structures: To con people, essentially. To obfuscate the risks. To create money out of nothing. (the most profitable way to make it)

That's not a new problem. There's a reason we created financial regulations, why we have book-keeping, demand financial transparency, auditing, etc. This happened because it was allowed to happen. Because nobody stepped in and stopped this obfuscation from happening. I don't blame the computer models. If someone cons you into signing a bogus, misleading contract - the problem isn't with the paper it was written on or the language that was used. The problem is with the law allowing such contracts to have legal force (which is a regulatory problem from another century).

To extend that analogy, this is a bit like standing in that situation and asking whether or not written contracts are a bad thing, and whether we shouldn't go back to simpler, oral contracts. The bottom line is: As long as it's profitable, there will always be people trying to obfuscate and hide information for economic gain, and there will always be a need for regulation and oversight to stop people from doing that. But blaming the methods by which it's done is pointless.

You're serious, aren't you? Have you any evidence to support that assumption, or did you pull it out of your ass?

Financial transaction processing is done via relational database in almost all cases. Or do you really think the volume of transactions handled by a decent-sized bank, even on a daily basis, could fit in 65k lines?

I was actually pretty involved in automated trading systems until a few months ago. The over-arching problems with the systems is they can either be tactical or strategic. Tactical systems make trades in milli-seconds and make decisions based on a dozen or so parameters. There is no human intervention. The money is made getting your trades in faster than the other guy. The problem is there are a lot of reactionary traders out there who see this movement and then react... without really determining what

There are two equally valid descriptions of markets. One is by Adam Smith, with the "unseen hand" guiding the markets. Smith markets are well behaved, efficient, and amenable to analysis by what amount to small-signal statistics.

The other description is by Charles Mackay in his book "Extraordinary Popular Delusions and the Madness of Crowds." In that book he describes the Dutch tulip craze and other bubbles in history prior to the mid 1800's. This economic crash is more of the same.

The models, probably because of "free market" ideology, assume a market where Adam Smith's "unseen hand" is at work. The modelers don't consider the kinds of markets described by Charles Mackay. Most of the models are based on the Black-Scholes option pricing theory. If you look at the assumptions underlying that theory, they describe good behavior, efficiency, and changes describable by what amount to small-signal statistics.

Mackay markets are boom and bust, with greed and lies and herd behavior all around. That's what we had. The underlying mathematics has been studied, but not for markets. If you have a pre-LCD TV, an electronic circuit that is non-statistical but related to boom-and-bust market behavior creates the sawtooth sweeps that paint the picture onto your screen.

It is not the computers or the communication standards. Sorry, not our poor computers, not the right target for the blame game.

The challenge of the crisis is intellectual. Look, I remember that economists always explained me that they have no clue where the US growth rates come from systemically or can explain where the financial markets make all that money. The surprise was that it didn't crash earlier.

There are lots of problems in the financial system that have nothing to do with computers. If anything, computers have brought these problems to light.
You see a lot of this pointed out on Jim Cramer's show "Mad Money", http://madmoney.cnbc.com/ [cnbc.com]
Most of our problems have to do with the lack of transparency in financial systems on supposedly public traded companies. As Cramer pointed out, "How can you have these levels of fiction after Sarbone-Oxley?" Moreover, with the recent Ponzi scheme uncovered, it makes you wonder just how interested is the SEC in maintaining the integrity of the financial system? That and allowing the short sellers to destroy the banks, leaving the tax payer to bail out the investors in order to preserve the financial system.
Thank god, we have the best form of government money can buy. Unfortunately, it even works to preserve the status quo when the original players are bankrupt. Nothing new here, after all, Japan's emperor was able to maintain control long after he had been defeated.
I am sure the US empire will survive this minor setback. The Hessian empire was bankrupt for hundreds of years before it ultimately collapsed. Maybe we can drag this on until the next Ice Age or until we poison all life to extinction, so who cares about the messes in the meantime?

I always think it's funny when people discuss putting the laws of robotics into practice. They seem to forget (or perhaps did not notice) that Asimov's short stories concluded that such laws and rules won't work. I think in this case it is a very apt comparison.